Trade and tactics

No place for forex complacency or export pessimism

The good news on the export front for the month of November is another welcome silver lining. It remains to be seen though whether this is a blip or an intimation of a turnaround. The recent depressed global market conditions should not foster excessive pessimism on the foreign trade front. Given India’s lowly share of world trade, it should be possible for us to push exports even in the face of a global slowdown if domestic competitiveness is enhanced. The continued surge in India’s foreign exchange reserves along with the pervasive global slowdown seems to be engendering a curious mix of policy complacency and renewed export pessimism. The forex buildup is welcome and innovative ways must be found to ensure that these reserves are productively utilised. However, in the aftermath of the financial crises of the past five years, large economies have come to view large forex surpluses as an insurance against risk and India requires the present level of reserves given our import dependence in energy and the slow growth of exports. Hence, there is no room for complacency merely because we are sitting on reserves of upwards of $48 billion. Indeed, the government can usefully consider using at least $500 million to help in the reconstruction of Afghanistan by offering cheap credit to Indian companies willing to participate in infrastructure development in Afghanistan. India should go to Tokyo for the meet of the Afghanistan reconstruction group with such an offer.

There is also no room for export pessimism considering that ten years after economic liberalisation, India’s share of world trade remains a paltry 0.8 per cent, still way below the 2 per cent share we had in the 1950s, though up from the trough of 0.5 per cent in the late 1980s. Economists have again started advocating rupee devaluation as a means of bolstering exports. This idea has resurfaced in the context of the proposal to bring India’s tariffs in level with “Asian rates”, as announced by the Union finance minister in his budget speech last year. The finance minister is expected to begin the process of cutting tariffs in next year’s budget. There are, however, limits to rupee devaluation and limited gains to be had in the short run, but there is no reason at all why an appreciation of the rupee should be celebrated or enabled.